Banking with the Blockchain

Believe it or not, banks are already interested in the blockchain. Financial institutions around the world are actively looking to implement the technology, which has been the focus of many internal reports. What scares them is the Bitcoin system it's enabled.

If you take away the mixers and various anon-coins, the blockchain is actually a very transparent thing. Every address is publicly tracked, which some in the industry hope to use against financial criminals. They could even create altcoins with user identification built in.

Most Bitcoiners should have mixed feelings about that, but there are economic upsides to all of this. The blockchain's method of recording data like transactions is simply more efficient and secure than using a centralized server. It will save billions of dollars on the fight against cyber-criminals, automate several traditional accounting functions, and increase interoperability with other institutions.

Unfortunately, there are two major things holding banks back from leveraging the blockchain in this way. One is their aforementioned fear of Bitcoin: anything that can enable anonymity is a concern for them, but more importantly, they don't understand how it works. Many bank officials are older and don't know how to use it, and are reluctant to step into the unknown.

Even if all of them could utilize the blockchain themselves, it's unwieldy in its current form. Bitcoin has the most secure blockchain deployment, but utilizing Bitcoin directly presents significant limitations. 10-minute confirmation times are too slow for many banking operations, and and banking data is huge. The mass of banking data would bloat the blockchain, and may require multiple transactions, all of which will cost fees. The banking industry will need a new platform, layered on top of Bitcoin or another protocol.

Factom plans to be that platform. Using its own cryptography protocol on a distributed system of servers, Factom organizes its user's data into blocks, but with a much cheaper transaction fee. Factom records entries within seconds, allowing processes to move much faster than possible on Bitcoin itself.

Every ten minutes, the Factom blocks are combined via hashing into a single hash value--basically a hash acts like a "numeric fingerprint" for data, much as a real fingerprint can identify a person--which is inserted into a block in the Bitcoin blockchain via a Bitcoin transaction. If somebody with fake account data to send you money they don't have, the hash value of their Factom blocks won't be the same as the one on the Bitcoin blockchain, warning you to stay away. Factom comes with the full security of Bitcoin, which cannot be hacked like a central server.

To take advantage of this, banks just need what are called "Entry Credits," which are required to upload data to the Factom servers. Entry Credits are created from Factoids. Factoids can be freely traded, so a store can provide Entry Credits to customers, without customers having to have any Factoids. Since Entry Credits are non-transferable, non-refundable, they represent a license to use the protocol, not a cryptocurrency. The bankers would never need to touch a bitcoin, nor a Factoid, yet they can have full access to the blockchain.

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